Editorial: Will MPC increase policy rate to rein-in inflationary pressures?

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Dr. Ernest Addison, Governor, Bank of Ghana, and Chairman of the Monetary Policy Committee

In its last three meetings, the Monetary Policy Committee of the Bank of Ghana decided to hike the policy rate twice – in the January and March sessions – while maintaining the rate in May this year (2023).

However, as the Committee prepares for its July meetings scheduled from July 19 to July 21, market analysts hold mixed opinions on its possible stance. Some anticipate a cautious hike in the policy rate while a few expect it to be held at 29.50 percent to support growth.

These differing views reflect uncertainty surrounding the recent inflationary trend, and potential risks in the economic outlook. For a start, recent developments in food prices herald mounting uncertainties for the July 2023 inflation outlook.

While challenges in this year’s food harvest season further compound these concerns, according to the Ministry of Food and Agriculture, crop yields are expected to decline by about 7 percent due to the impact of climate change and increasing fertiliser cost.

These factors could contribute to elevated food costs, adding to inflationary pressures and potentially necessitating a resumption of interest rate hikes by the MPC.

Market observer Constant Capital projects that the increase in June 2023 inflation will motivate the MPC to resume a contractionary monetary policy stance by hiking the policy rate to rein-in inflationary pressures.

This notwithstanding, GCB Capital expects the Committee to maintain the policy rate at 29.50 percent. While the disinflation process may resume in July 2023, food prices remain a significant source of price pressure.

GCB Capital emphasises that while there are expectations of inflation resetting on a downward path from July 2023, due to lagged impacts and favourable base effects, it flags simmering food price pressures as a near-term upside risk to inflation.

Consequently, these pressures could moderate the pace of disinflation, it further notes.

The disinflation process has been supported by tight monetary policy, additional liquidity management operations to address excess liquidity, relative stability in the local currency and easing of ex-pump petroleum prices.

Mounting food costs, raises concerns about effectiveness of the current policy rate stance, which decreased inflation from 54.1 percent in December 2022 to 41.2 percent in April 2023.

According to data released by Government Statistician Samuel Kobina Annim, annual inflation accelerated to 42.5% in June – up from 42.2% in May. The increase in inflation was primarily driven by surging food prices.

Although food prices have been on a downward trend on the global market for more than a year now, domestic foods prices continue to skyrocket.

At a recently-held high-level multi-stakeholder forum dubbed ‘promoting fair food pricing in Ghana’, stakeholders in the agriculture value chain lamented the poor nature of roads – which they say is contributing to the current high food prices in urban settlements.

According to a senior lecturer at the University of Ghana’s Agriculture Economics and Agribusiness Department, Yaw Osei-Asare, bad roads play a major role in price hikes as drivers have to spend more on servicing their vehicles when transporting food items from farms to the market; a cost that is passed on to the final consumer.

The forum was organised by Consumer International in partnership with the Ghana International Trade Commission (GITC), as part of an agenda for bringing together governmental and non-governmental stakeholders to share evidence and expertise on the issue of unfair food prices on the market.

The meeting also sought to discuss policy and enforcement actions required from authorities against unfair food prices caused by anti-competitive practices; and to also agree on the actions required from all stakeholders to support a stronger, fair and competitive food marketplace.

Other participants attributed the food price hikes to climate change and the change in weather patterns, saying it has a greater impact on food security. However, consensus was reached that government should incorporate regulatory bodies that ensure fair pricing – which will in turn help grow the agriculture sector.

There is no doubt that the poor state of roads from farm-gate to urban selling points is a contributory factor to the recent hike in food prices; but one cannot discount the impact of climate change on productivity, coupled with the fact that agro-inputs like fertiliser are in short supply due to the Russia/Ukraine conflict which has negatively impacted supply chains.

All in all, ensuring agricultural produce is within reach of the average consumer is crucial to taming inflationary pressures. That’s why it’s crucial for the second round of Planting for Food and Jobs (PFJ) to yield positive outcomes.

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